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Having excellent credit makes it significantly easier to get approved for loans and credit cards—and with the best rates and terms. But creditors consider a number of factors that aren't part of your credit rating when determining whether or not you're eligible.
Even if your credit is stellar, a lender may find issues that lead it to deny your loan application. Understanding what creditors look for can help improve your chances of being approved for a new loan or credit card.
Why You Could Be Denied With an Excellent Score
In addition to your credit rating, creditors look at a variety of factors to determine your creditworthiness. Here a few of the common scenarios that could get in the way of your approval:
- Insufficient income: While income isn't factored into your credit scores, some lenders do have minimum income requirements. Earning less than the minimum could signal to a lender that you may have a difficult time covering a new debt payment.
- High debt-to-income ratio (DTI): This calculation looks at how high your debt payments are in comparison to your income. Even if you make good money, high monthly debt payments could indicate financial instability and may cause lenders to view you as a risk.
- Employment history: A short or unstable employment history may be a deterrent to creditors. Some lenders even want to see that you've been consistently employed for at least two years, and may want to verify your employment before approving your loan application.
- Savings or cash assets: Lenders may want to see that you have savings or other cash available. Showing that you have money set aside assures creditors that you have the means to make your loan payment if an unexpected expense comes up.
- Other negatives: Some negative items on your credit reports have little or no impact on your scores, but are still a red flag for creditors. Unpaid debt, for example, can be a cause for denial. Some lenders may ask you to pay off old collections before approving you for a new loan.
What Happens When You're Denied Credit?
Applying for a loan or credit card can have a temporary, small negative impact on your credit scores when the lender checks your credit, but being denied does not hurt your credit at all—or even appear on your credit report.
If your application for a new loan or credit card is not approved, you'll have the opportunity to learn why. The creditor is required to give you an adverse action letter, which includes a brief explanation of why you were not approved. It should also include information on how to get a free copy of the credit report the lender used to make its decision. This gives you a chance to see what the creditor saw, and can be a good opportunity to address any possible inaccuracies on your credit report or take steps to improve your credit.
If your letter doesn't tell you how to pull your free report, you can request it directly from the reporting agency named in your letter. For instant access to your Experian report, you can submit a request through Experian's Report Access page.
What's Your Next Step?
Being declined doesn't mean you'll never be able to borrow money or open a credit card again. The best way to improve your chance of approval is to make sure you understand and address the reason you were denied.
Depending on your circumstances, you may want to take one of the following steps:
- Search for a different creditor. Not all creditors have the same requirements for approval. Shopping around might help you find other, more flexible lenders. But be cautious. If you don't address the reason for past denials, you may only be approved for credit with high interest rates or restrictive terms.
- Find a cosigner. Having a cosigner can help your chances of being approved next time you apply. A cosigner doesn't need to have excellent credit, but they do have to take on a big responsibility. This includes being fully responsible for your debt payments if you stop paying.
- Give it time. If your debt-to-income ratio is high or you're facing other financial difficulties, you might need some time to address the problem. Solutions could include saving cash instead of using a loan for your purchase or taking on a temporary side job.
- Get outside assistance. If you're already having difficulties paying your debt, a new loan or credit card might not be the best solution. Instead, try asking your creditors for help. In some cases, they may be willing to reduce your payments or your interest rate if it helps you stay current on the account. If creditors can't offer the help you need, reach out to an approved credit counselor to explore all of your options. Together you can determine the best plan for managing your debt.
Being denied credit when you have excellent credit scores can be a shock, and throw a wrench into your plans. Using your adverse action letter to address the issues that caused the denial may not help this time, but could put you on a path to approval the next time you apply for credit.
As you work to improve your financial situation, consider monitoring your credit regularly to ensure your scores stay high. Experian's free credit monitoring service allows you to check your credit report and scores regularly for free, and alerts you when there are changes to your credit report. Maintaining an overview of your credit and finances can help you move forward in the right direction.